However, for those looking to boost margins and customer experiences dramatically, at the same time, the answer lies in cutting-edge technology.

According to a recent McKinsey report, insurers can use technologies such as telematics and sensors in connected ecosystems to differentiate themselves from the competition by providing customers with warnings in order to prevent losses.

The future of insurance is enabled by telematics and IoT

Telematics is an interesting branch of technology. It essentially gathers information from sensors onboard vehicles and relays them back to an organization (typically the car manufacturer) for processing.

The rise of IoT takes this concept and expands it further to include a wider group of devices — from health monitors and fitness trackers to thermostats and fire alarms.

In the future state, insurers will gain access to (with permission) all this data in real-time to provide customers with alerts to help them mitigate risks.

Smart customers, in turn, could build in standard operating procedures at their factories, offices, and other facilities to respond quickly to those alerts and possibly reduce premium payments in the future.

McKinsey’s report provides some examples:

Sensors in buildings will alert owners and insurers when temperatures indoors get low enough to freeze pipes and automatically trigger integrated smart thermostats to turn up the heat

In areas vulnerable to hurricanes, smart homes will automatically deploy hurricane shutters based on weather notifications sent by the insurance carrier

In the manual labor workplace, sensors embedded in workers’ clothing and telematics devices in machines will notice that an employee is working long stretches and prompt her to take breaks to maintain alertness.

Ideally, the launch of 5G will democratize how businesses use sensors and make telematics and IoT an even more compelling sell to insurance companies looking to transform their business model in the digital age.

“Reducing claims will fundamentally change the relationship of insurers to customers—they will become partners in loss prevention,” claimed McKinsey’s consultants in the report titled Claims 2030: Dream or Reality.

Collaboration is key to digital success for insurers

Businesses and consumers are both beginning to use smart devices. Obviously, each is built by a different vendor and provides a different set of services.

However, in order for insurance companies to effectively migrate to a preventive model, they need to really hone their ability to collaborate with a variety of vendors across the board.

Further, there’s a first-mover advantage for insurance companies that go all-in on this strategy and plunge into the building the digital-first ecosystem of the future. They’ll be the ones that build the most and the strongest relationships across the industry, and naturally, have the most compelling proposition for customers.

“Achieving this integrator status will not be easy, but it will be necessary because of fierce competition between the various parties seeking to own customer data and information. Insurers will need a strategy to succeed.”

Although McKinsey’s report makes a strong case for an ecosystem-based, digital-first future of the insurance industry, the reality is the move to that future state is going to be quite slow.

The industry is struggling to upgrade its legacy infrastructure and must clearly evaluate risks such as data security and privacy before taking the leap.

Insurers that manage to accelerate the pace of change will not only be heralded as the pioneers of the new era of insurance but also wow and delight customers like never before.